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Turning Japanese?

Client Talking Points

Pump It To QuadrillYen

The Bank of Japan’s announcement this morning will most likely have the people of Japan cringing for what their future has in store for them. The Yen rallied +1% on the news that the BOJ would target “2% inflation” and would buy assets that range from Scooby Doo action figures to European bonds. In lieu of this, Japanese stocks snapped their immediate-term TRADE support for the first time in months. People who are short the Yen this morning are probably grimacing as they realize their timing couldn’t be worse. Shinzo Abe and Taro Aso have a lot more fun in store for those involved in the Currency Wars. If this story with the Bank of Japan seems familiar, it’s probably because we’ve done the old asset purchase shuffle here in the U.S. a bunch of times. 

America Rules

American’s should be feeling pretty good about what’s going on in our country right now. Our Macro Theme of #GrowthStabilizing is taking hold as the housing market and the labor market show significant improvements. And look at the stock market. Five-year highs in the S&P 500 and brand new highs in the Russell 2000? The retail crowd will certainly smile at that news. Fantastic. Just remember that the markets go up until they don’t. Things can change overnight and we can go right back to the starting line without finishing the race.

Asset Allocation

CASH 55% US EQUITIES 12%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

ADM

ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"Only 32% Are Aware If Their State Is Establishing A Health Care Exchange... tinyurl.com/33lscbm#healthcare" -@RasmussenPoll

QUOTE OF THE DAY

“I never think of the future - it comes soon enough.” -Albert Einstein

STAT OF THE DAY

Bank of Japan announced Tuesday it would switch to an open-ended commitment to buying assets next year and double its inflation target to 2 percent.


Morning Reads From Our Sector Heads

Note: Each morning we'll post what stories Hedgeye's various sector heads and analysts are reading. 

 

Jay Van Sciver (Industrials):

 

-Building Bridges (PBS)

 

-Delta Airlines 8-K (SEC.gov)

 

Brian McGough (Retail):

 

-Manchester United Announces Strategic Acquisition of BskyB’s One-Third Stake in MUTV (Yahoo!)

 

-Nike, New Balance Fight Over Eliminating Tariffs (Source Journal Online)

 

Rob Campagnino (Consumer Staples):

 

-Loeb shorts Nu Skin (NY Post)


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 22, 2013


As we look at today's setup for the S&P 500, the range is 18 points or 1.01% downside to 1471 and 0.20% upside to 1489.                

                                                                                                               

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 101


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.61 from 1.59
  • VIX  closed at 13.42 1 day percent change of -0.96%
  • AAPL – “Most Read” article on Bloomberg this morn = “Apple May Face 1st Profit Drop in Decade As iPhone Slows”… so, ahead of AAPL earnings (tomorrow), it’s getting real newsy (UBS cutting price target this morn too) – but the stock isn’t raging oversold on my signal yet (it would be at $482). AAPL’s TAIL risk resistance line = $561.

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Nat Activity Index, Dec. (prior 0.1)
  • 10am: Richmond Fed Manufacturing Index, Jan. (prior 5)
  • 10am: Existing Home Sales, Dec., est. 5.10m (prior 5.04m)
  • 10am: Existing Home Sales M/m, Dec., est. 1.2% (prior 5.9%)
  • 11am: Fed to buy $1b-$1.5b TIPS in 2017-2042 sector
  • 11:30am: U.S. Treasury to sell $32b 3-mo notes, $28b 6-mo notes

  GOVERNMENT:

    • Obama seeks optimism renewal in 2nd inaugural ceremony
    • House, Senate meet at 10am
    • House Ways and Means holds hearing on debt limit
    • Senate debate, vote expected on Hurricane Sandy relief
    • Pfizer CEO Ian Read to testify in U.S. District court in jury trial on claim Chantix causes psychiatric disorders

WHAT TO WATCH

  • Dell said to hire Evercore to seek higher bids after buyout
  • Obama seeks optimism renewal at 2nd inauguration ceremony
  • BOJ sets 2% inflation target without adding stimulus in 2013
  • Greece’s new loan payment is cleared by euro area
  • Eurogroup picks Dutchman Dijsselbloem to succeed Juncker
  • Euro area grapples with ESM bank aid rules; set to approve design of financial-transaction tax
  • Atari U.S. units file for bankruptcy to break from parent
  • Alstom 3Q orders rise 3%, led by demand for trains
  • German ZEW investor confidence rises to highest in 2 1/2 yrs
  • SABMiller lager volume rises less than analyst ests
  • EADS CEO says to meet, beat earnings, sales goals at units
  • Israelis vote with Netanyahu probably heading for 3rd term

EARNINGS:

    • Dupont (DD) 6am, $0.07
    • Verizon (VZ) 6:30am, $0.50 - Preview
    • II-VI (IIVI) 6:55am, $0.21
    • Regions Financial (RF) 7am, $0.21
    • Synovus Financial (SNV) 7am, $(0.11)
    • Travelers (TRV) 7am, $0.14
    • Waters (WAT) 7am, $1.59
    • TD Ameritrade Holding (AMTD) 7:30am, $0.24
    • Delta Air Lines (DAL) 7:30am, $0.28
    • FirstMerit (FMER) 7:30am, $0.33
    • PrivateBancorp (PVTB) 7:30am, $0.26
    • Brinker International (EAT) 7:45am, $0.50
    • Johnson & Johnson (JNJ) 7:45am, $1.17 - Preview
    • Freeport-McMoRan (FCX) 8am, $0.72 - Preview
    • Kansas City Southern (KSU) 8:01am, $0.82
    • Canadian National Railway (CNR CN) 9am, C$1.41
    • Celestica (CLS CN) 4pm, $0.19
    • Cree (CREE) 4pm, $0.30
    • RF Micro Devices (RFMD) 4pm, $0.06
    • Total System Services (TSS) 4pm, $0.33
    • Woodward (WWD) 4pm, $0.46
    • CSX (CSX) 4:01pm, $0.39
    • Google (GOOG) 4:01pm, $10.55
    • Ezcorp (EZPW) 4:01pm, $0.58
    • Albemarle (ALB) 4:03pm, $0.99
    • IBM (IBM) 4:03pm, $5.25
    • CA (CA) 4:05pm, $0.61
    • Intuitive Surgical (ISRG) 4:05pm, $4.04
    • Norfolk Southern (NSC) 4:05pm, $1.19
    • Compuware (CPWR) 4:13pm, $0.10
    • Advanced Micro Devices (AMD) 4:15pm, $(0.18)
    • International Game Technology (IGT) 4:15pm, $0.24
    • Trustmark (TRMK) 4:30pm, $0.44
    • Texas Instruments (TXN) 4:30pm, $0.07
    • Community Bank System (CBU) 4:30pm, $0.54
    • UMB Financial (UMBF) 4:30pm, $0.67
    • Packaging of America (PKG) 5pm, $0.62
    • Rock Tenn (RKT) Post-Mkt, $1.27

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Commodities Climb to Three-Month High After Japan’s Policy Shift
  • Palm Favored by Ospraie Rising as Reserves Retreat: Commodities
  • Gold Trades Near One-Month High as BOJ Announces Stimulus Plan
  • Copper Reaches One-Week High as Bank of Japan Signals Stimulus
  • Brent Oil Rises to One-Week High as Japan Pledges More Stimulus
  • Sugar Drops to 2 1/2-Year Low as Stockpiling May End; Cocoa Down
  • Freeport Earnings Beat Estimates on Higher-Than-Expected Sales
  • EDF Investors at Risk of Losing Record Dividend on Costs: Energy
  • Iron-Ore Port Braces for Australian Storm as Apache Shuts Fields
  • Inmet Is in Confidentiality Pacts, Talks With Number of Parties
  • SovEcon Sees Weather Risks for Winter Crops in Southern Russia
  • Worst European Coal Slump in Five Years Not Over: Energy Markets
  • Billionaire Fredriksen Winning as LNG Tanker Rates Drop: Freight
  • Wheat Climbs to One-Month High as Winter Threatens Russian Crop

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


GERMANY – despite the best ZEW print since May of 2010 (31.5 JAN vs 6.9 DEC), the DAX remains under corrective selling pressure this morn after failing to make higher-highs. Was that the ‘as good as it gets’ print for European high freq data? Maybe.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


JAPAN – Abe called the BOJ’s inflation targeting “epoch making”, and while I am not sure what that’s supposed to mean, the market bought/covered Yen, big time, +1% vs USD on the “news” – Nikkei stopped going up on that and actually broke immediate-term TRADE support (10,733) for the 1st time in mths; Big Government Intervention = amplified market volatility.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW

Takeaway: Our risk monitor continues to flash benign readings on most fronts, though the overt positives are fewer than in recent weeks.

* 2-10 Spread – Last week the 2-10 spread tightened 3 bps to 159 bps. 

 

* Markit MCDX Index Monitor – Last week spreads tightened 8bps, ending the week at 113 bps versus 121 bps the prior week.  

 

* Sovereign CDS – Sovereign Swaps were mostly wider last week with Japan putting on a major move. Japanese CDS widened by 13 bps last week to 87 bps (a move of 17.8%). Meanwhile, the US also widened by 5 bps to 44 bps. This means the US now trades outside Germany (40 bps). Elsewhere in Europe, swaps were relatively unchanged. 

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.3% downside to TRADE support.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 19

 

1. American Financial CDS -  Swaps were mostly wider in US financials last week, but AGO, MBIA and Genworth all posted notable week-over-week tightening. Overall, swaps widened for 18 out of 27 domestic financial institutions.

Tightened the most WoW: GNW, AGO, TRV

Widened the most WoW: MTG, C, COF

Tightened the most WoW: GNW, AGO, MMC

Widened the most MoM: GS, C, WFC

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 1

 

2. European Financial CDS - Swaps mostly widened in European Financials last week, though there was nothing especially noteworthy.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 2

 

3. Asian Financial CDS - Japanese banks widened by 6-12 bps, following the sovereign wider. Chinese banks did the same, widening by 4-11 bps. India's banks were mixed.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 17

 

4. Sovereign CDS – Sovereign Swaps were mostly wider last week with Japan putting on a major move. Japanese CDS widened by 13 bps last week to 87 bps (a move of 17.8%). Meanwhile, the US also widened by 5 bps to 44 bps. This means the US now trades outside Germany (40 bps). Elsewhere in Europe, swaps were relatively unchanged. 

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 18

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 3

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 2 bps last week, ending the week at 5.90% versus 5.92% the prior week.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.8 points last week, ending at 1768.96.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 6

 

7. TED Spread Monitor – The TED spread fell 0.8 bps last week, ending the week at 22.8 bps this week versus last week’s print of 23.6 bps.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 3.1 points, ending the week at 10.5 versus 7.4 the prior week.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was flat week-over-week at 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 8bps, ending the week at 113 bps versus 121 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local government finances. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We are currently tracking the 16-V1 series.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 11

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 20 yuan/ton, to 3730 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened 3 bps to 159 bps. We track the 2-10 spread as an indicator of bank margin pressure.   

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 14

 

Joshua Steiner, CFA

 



Let's Do This

“C’mon! Let’s do this.”

-Ray Lewis

 

If Japanese policy makers really want to get nuts, they should sign Ray Lewis for the 2014 Money-Printing season. After taking down the Patriots this weekend, the 13x Pro Bowler is going back to the Super Bowl. It’ll be his last game. If Baltimore wins, it will be epic.

 

“You’ve got to go out and show them that I’m a different creature now than I was 5 minutes ago, cause I’m pissed off for greatness. Cause if you ain’t pissed off for greatness, that just means you’re okay with being mediocre.”

 

Yep. That’s what I am talking about Japan – some ole school Raven rants in those BOJ pressers.

 

Back to the Global Macro Grind

 

Evidently, the global currency market didn’t get the BOJ’s marketing message overnight. The Japanese Yen rallied a full +1% on the “news”, and Japanese stocks snapped immediate-term TRADE support for the first time in months. Isn’t a #QuadrillYen fun?

 

PM Shinzo Abe called the BOJ’s “2% inflation” targeting and asset purchase plan both “bold” and “epoch making.” That might sound like some serious stuff, but the new asset purchases don’t start until January of 2014 – so there’s this little thing called timing that people short the Yen today are getting Taro Aso’d by in the meantime.

 

If you didn’t know the Global Currency War is on, now you know. The Russians and South Koreans talked about it last week, and the President of the Bundesbank (Germany) is calling it out, explicitly, in the FT (Financial Times) this morning. If you want to show the world you are a “different creature”, you’re going to have to one-up The Bernank’s 2012 performance.

 

That’s no easy task – neither is seeing the US Dollar stabilize alongside weekly US economic growth data:

  1. US Dollar Index closed up another +0.6% last week and continues to make a series of higher long-term lows
  2. US Housing Demand (MBA weekly mortgage applications) ripped a +12.9% move, taking the MBA series to 205
  3. US Weekly Jobless Claims dropped to fresh new intermediate-term lows at 335,000

If what’s bad for a country’s currency is eventually really bad for that country’s real (inflation adjusted) economic growth, the opposite should hold true when a country’s currency stabilizes.

 

What if a stabilizing US Dollar became a strengthening one? How about strengthening the US Dollar +15% (from here) and hammering energy/food inflation next? Didn’t the President of the United States say “we, the people, are all in this together” now?

 

Can you think of a more galvanizing, progressive, and uniquely American marketing message than Strong Dollar = Strong America? I bounced it off the Keynesians in the Romney camp, and they didn’t get it either. But you, The People can get this – Yes You Can!

 

In other major global #GrowthStabilizing news:

  1. Chinese monthly data for December (Industrial Production and Retail Sales) accelerated versus November
  2. Chinese Exports for December ramped by +14.1% (versus +2.9% NOV)
  3. Germany’s ZEW Index (reported this morning) just hit a 2.5 year high (31.5 DEC vs 6.9 in NOV)

It’s been a while here, folks – but, setting aside the economic disaster that is Japan for a minute, we have the other 3 major global engines no longer stalling/slowing (USA, China, and Germany). That’s better than bad. And so is sentiment.

 

The problem with sentiment, of course, is that it tends to turn after markets move. And right now that’s precisely what many of my key sentiment indicators are starting to flag:

  1. US Equity Volatility (VIX) = immediate-term TRADE oversold at a 5-year low of 12.46
  2. II Bull/Bear Spread (Bulls minus Bears) = 3,090 basis points wide (53.2% Bulls, 22.3% Bears)
  3. Fund Flows (to US Equities, ex-ETFs) = +3.8B last week (versus +7.5B in the week prior)

In addition to last week’s -6.7% drop in the VIX, we’re seeing aggregate short interest in US Equities fall fast from their late November highs (that was a bullish signal) at the same time that NYSE Margin Debt rips to the high-end of its 5-year range (perma bulls lever themselves up on the long side at the end of a move trying to chase performance).

 

So, it’s all out there – the economic data; the price action; the sentiment indicators – and, no, they don’t always signal that you should be doing the same thing at the same time. But that doesn’t mean you don’t have to get out there every morning and get it. As Japan’s new ‘let’s get nuts’ prospect, Ray Lewis, might add: “Effort, is between you, and you, and nobody else.”

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar Index, USD/YEN, UST 10yr Yield, AAPL, and the SP500 are now $110.75-112.35 (Oil is back above TAIL support, bearish for Consumption), $1, $79.75-80.17, 88.58-90.61, 1.84-1.91% (Bonds continue to signal #GrowthStabilizing), $482-561 (into Earnings tomorrow), and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Let's Do This - Chart of the Day

 

Let's Do This - Virtual Portfolio


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